Second Reading Committee

[Mr. Roger Gale in the Chair]

Roger Gale: Before we start what I understand to be the first process of this kind, I remind the Committee that this is a Second Reading debate, not a Committee hearing. That means that the usual Committee rules do not apply and that Membersother than the Minister, who may, with the consent of the Committee, reply to the debatemay speak only once. This is not like a Committee in which Members may speak more than once. That does not, of course, deny Members the right to intervene, as they could on the Floor of the House, but they may make only one speech, and then that is it.

Bridget Prentice: I beg to move,
That the Committee recommends that the Perpetuities and Accumulations Bill [Lords] ought to be read a Second time.
It is a delight to serve under your chairmanship, Mr. Gale, especially in this rather novel fashion.
The Bill gives effect to the Law Commissions recommendations on the law of perpetuities and accumulations. It was met with general support in another place, and it will modernise, simplify and streamline the present rules. I should like to put on record my thanks to the Law Commission for its excellent and valuable work. The reforms are the product of extensive consultation and represent a good example of the Law Commissions work to create a clear, simple, modern and effective legal rule in areas of great complexity.
The Bill is also noteworthy as it was the first to be considered in another place under the new procedure for appropriate Law Commission Bills. It was subjected to close examination by the Special Public Bill Committee, which took evidence from experts, and amended in that Committee to reflect the consensus view across all parties.
The rules against perpetuities and excessive accumulation are almost certainly not widely known, but they are fundamental to a part of trust and property law, and apply whenever a will or a trust is drawn up. The rule against perpetuities strikes a balance between the present owners right to dispose of his or her property and the rights of future owners of that property to do the same. For example, a person might want to leave money to the first of their descendants to live on Mars. Until someone does so, the money will be held in trust, but that might not be the best economic use for it.
The rule against perpetuities specifies when the condition will be valid. Until 1964, that rule was entirely set out in case law, with the common law rule being that one could tie up property for the duration of a life in being, plus 21 years. That formula was broadly intended to cover the life of ones children and the minority of ones grandchildren. A gift that might end up vesting after this period could expire would be void from the outset. Some of the harsher results created by the common law were remedied by the Perpetuities and Accumulations Act 1964, which allowed one to wait and see whether a gift would fall foul of the rule, rather than declaring it void right from the start.
The Bill implements reforms to reduce the complexity of the rule by doing two things. First, it restricts the scope of the application of the rule. Under existing law the rule has been applied to contracts, options to purchase and other transactions that can be characterised essentially as part of commercially negotiated contracts, and there is no justification. Secondly, it eliminates the arcane life in being formula and replaces it with a fixed 125-year perpetuity period.
The rule on excessive accumulations is statutory and limits how long a person can add the income made on invested funds to trust capital without distributing it to beneficiaries. Again, that is too complicated. A settler may choose one of six different periods, which is hard enough in itself, but if no period is chosen, it is up to the court to decide what the person would have intended. More importantly, that is unnecessary. Accumulating income in a private trust will not unbalance the economy as was feared when that rule was invented.
In the case of property held on trust for charitable purposes, there remains a good reason for having a rule against excessive accumulations. A charity is created to provide a public benefit, and the application of a statutory accumulation period for charities ensures that that benefit is not unreasonably delayed.
The explanatory notes explain the current law and the proposed changes. I suspect that few lawyers claim to be experts in this very complicated area of law, so excuse me, Mr. Gale, for not getting too involved in the Bills technicalitiesyou might ultimately thank me for that. I will, however, give an outline of the clauses.
Clauses 1 to 6 set out the scope of the rule against perpetuities and how the period is to be determined in any case. Clause 1 defines the reformed scope of the application, and the rule will be restricted to circumstances in which it is needed, and disapplied when it unnecessarily interferes. The rule will apply, for example, to family settlement arrangements, but not to a future easement for a road to access a proposed housing development. Clause 2 preserves existing exceptions to the rule, and clause 3 creates a power for the Lord Chancellor to make orders to create further exceptions to the application of the rule, if necessary. Clause 4 abolishes the existing statutory exceptions where the Bill applies, because they will be unnecessary, and clause 5 imposes a mandatory fixed 125-year period of perpetuity for trusts taking effect after the commencement of the Bill. Clause 6 defines when the perpetuity starts for estates, interests, rights and powers within clause 1, which clarifies the law.
Clauses 7 to 11 broadly replicate the effect of reforms introduced by the 1964 Act in relation to the rule as it applies under clauses 1 to 6. Clause 12 is the only provision that will apply to existing trusts. Perpetuity periods are usually defined by reference to a life in being. In practice, it can be difficult to discover when the measuring life or lives in being has ended, so it can be time-consuming and expensive to determine when a trust is supposed to end. Clause 12 therefore allows trustees of existing trusts to opt into a 100-year perpetuity period if they believe that it is difficult or not reasonably practicable to determine whether the perpetuity period applicable to the trust has ended.
Clause 13 abolishes accumulations restrictions for trusts created after the commencement of the Bill, and clause 14 limits accumulations for instruments to the extent that they provide for property to be held on trust for charitable purposes. While private trusts will be allowed to accumulate for the length of the perpetuity period, charitable trusts will be subject to a statutory limit. Charitable trusts will be able to accumulate for 21 years or for the life of the settlor or, if there are more than one, a specified settlor. Provision can also be made for a different period by the Charity Commission or the courts where appropriate after considering the individual circumstances of the particular charity.
Clause 15 defines the application of the Bill and, as I have said, with the exception of clause 12, the Bills provisions will operate for trusts created after its commencement. That is important, because if the general legal framework of a trust is changed, it can have an effect on the distribution of the property subject to the trust, which may have an adverse or unexpected result for some beneficiaries. Clause 16 repeals certain provisions that will no longer be necessary, and clause 17 defines the application to the Crown. Clause 18 ensures that a separate legal rule about non-charitable trusts is not affected by the Bill, and clause 19 ensures that the Bill will apply to oral, as well as written, trusts.
As I have said, this is a technical Bill, but it is relevant to a large number of people. Trusts are an important means of sharing private and charitable wealth. Ensuring that the underlying rules are modern will help to increase the attractiveness of the law of England and Wales to investors. I would like to thank everyone who has contributed to the formulation of the Bill.

Henry Bellingham: It is a pleasure to serve under your chairmanship, Mr. Gale. I thank the Minister for explaining the position so clearly. I declare an interest as a barrister who practised a certain amount of chancery law during my time at the Bar.
As the Minister pointed out, the Bills passage is taking place under new procedures so that when the Law Commission has recommended simplification and improvements to aspects of law, Bills brought before the House, with agreement through the usual channelsespecially when the Bills are not controversialcan be expedited and brought into law much more quickly.
On Friday, the House debated the remaining stages of the Law Commission Bill, which will help the Law Commission to improve its relationship to Parliament. The Lord Chancellor will have to report to Parliament on the work and recommendations of the commission, and also explain to Parliament why those recommendations have not been taken up and brought into law. All too often Law Commission recommendations simply gather dust on shelves. I understand that the consultation that led to this Bill started in 1992. The Law Commission came out with its report on perpetuities and accumulations in 1998, and we are now in 2009, so it has been a long haul.
As the Minister pointed out, the Bill affects a substantial number of our constituents, although many of them probably do not know that they will be affected because the whole area of trust law moves in a fairly mysterious way. However, it is important that trust law is updated and that it is made as simple and as user-friendly as possible, so we welcome the Bill.
Although I welcome the fast-track procedure, it is a pitygiven the paucity of legislation before the House and the number of days on which we are basically inventing business to take on the Floor of the Housethat it could not be dealt with on the Floor in the normal way. That would not have slowed the progress of the Bill in any way, shape or form, and it could have widened our discussion and given other hon. Members a chance to participate. However, that is obviously a matter for the usual channels.
Restricting the application of the rule of perpetuities to successive estates and interests in property is a good thing. Under this Bill, the rule will no longer apply to rights over property such as options, rights of pre-emption and future easements, which the Minister mentioned. It will also exclude all pension schemes. I therefore welcome the first part of the Bill. Although strong arguments were made in another place about the extension of the fixed perpetuity period from 80 to 125 years, we need as little complexity as possible, and the more time afforded to sort out difficulties, the better, so the proposal makes sense.
As I understand it, the provisions will apply prospectively, but can the Minister tell the Committeeor the Houseabout the position regarding wills when death occurs after the Bills commencement? Is it a fair reading of the situation that the Law of Property Act 1925 and the Perpetuities and Accumulations Act 1964 will probably still be needed for another 100 years? One point raised in the House of Lords on a couple of occasions, although I do not think a satisfactory answer was ever given, was the question of who were the lives in being for the purposes of wait and see under common law and the 1964 Act? Will the Minister address that point?
I welcome making the accumulations rule more straightforward and comprehensible. Some concerns have been raised about the default position for charitable trusts which, as the Minister mentioned, will be 21 years. That could be set aside by a court, or by the Charity Commission, under clause 14(2). That will become less relevant, because I suspect that charitable trusts will be used much less frequently due to the new existence of community interest companies and charitable incorporated organisations, which were introduced under the Charities Act 2006. Of course a charity could go to court or the Charity Commission to have the accumulation rule lifted, but is the 21-year provision still a little onerous? Given that a lot of charities now look at total return, rather than at income on the one hand and capital gains on the other, it might be somewhat burdensome to tie their hands, even for 21 years.
How easy will an application to the court be? Will the process be simple, or an extremely expensive one that will benefit people in my former profession? Will the Department discuss such issues with the charity commissioners to ensure that applications made to the commission on the 21 years and the exemptions under clause 14(2) will be dealt with extremely swiftly and expeditiously?
Paragraph 25 of the explanatory notes says that existing trust instruments and wills taking effect before commencement will generally not be affected by the Bill. What does generally mean in that context? Does it mean that some elements will be retrospective? If that is the case, which ones? Will the Minister elaborate a little more? If she has to seek further and better instruction and write to me, I will be perfectly understanding. This point is important, because the word generally implies exceptions.
With those questions, Conservatives Members support the Bill and the new expedited procedure for getting Law Commission Bills moved forward. The Law Commission Bill also has all-party support, and I hope that it will become an Act soon. We very much hope that the excellent improvements that the Law Commission recommends are brought forward as quickly as possible because, after all, the commissions whole raison dĂŞtre is to improve the law, and to ensure that ancient statutes that are no longer applicable are repealed, and that laws relevant to our constituents that are non-controversial and might not otherwise see the light of day are brought forward as quickly as possible.

David Howarth: I know that people think that this is an obscure subject but, as Lady Deech pointed out in the House of Lords, the plot of the film Body Heat, turns on the rule against perpetuities. She wondered whether she was the only person in the world who got excited at that point in film, but I got excited as well. It is also the only bit of land law that I understand so it is a shame to abolish it, but that is obviously not a good reason to oppose the Bill.
The Minister laid out the main advantages of the Bill: the disapplication of the rule in what are essentially commercial transactions; getting rid of the lives in being plus 21 years measure, which is difficult to apply in many cases, replacing it with a bright-line rule of 125 years; and the abolition, except for charities, of the rule against accumulations, which was introduced in the early 19th century in, I have to say, a panic of the sort that we are very familiar with these days. It is a good Bill in principle and I wish it well.
The debate in the House of Lords produced some interesting questions, but, I think, only one big policy issue remains: would it be a good idea to go further than the Bill suggests and abolish the rule altogether? The economic arguments for the rule against perpetuity are not entirely clear, but there are two of them. First, on the whole, trustees tend to be less entrepreneurial and take fewer risks in their investment decisions than beneficiaries, so, over the long term, the economy will be less innovative and productive. Secondly, if we allow trusts to go on for many years, it may often be unclear who is entitled to the benefit of the trust. The trust may end up with tens of thousands of beneficiaries and most of the money taken up trying to find out who they are. The trust will disappear in transaction costs, or lawyers fees as they are more rightly known.
On the other side, there is an argument that for many people the desire to control their property after they are dead is an important motivation for what they do when they are alive; they tend to work harder to build up their assets so that they can control the future. Therefore, if we were to go the other way we would lose that incentive. It is difficult to judge the net effect of those two possibilitiesthere is no real evidence. In the US, half the states have abolished the rule and half have not, and there is some evidence from there about the effects. However, it merely seems to show that if a state abolishes the rule it attracts a lot of trust business from other states, and that has to do mainly with taxation, rather than trust, rules: if accumulated income is not taxed, it attracts business in. The big issue there is whether that is good for the economy. Trust administration business is attracted into the country, but is that the kind of economy that the country wants to rely on?
The other arguments about whether the rule should be abolished altogether concern fairness between generations, and that is difficult to judge. On one side is the freedom of people now to do what they want with their own property, and on the other is the freedom of people in the future to do what they want with property that comes to them. Getting to a single rule that balances those two interests is difficult.
It seems that the Law Commission has taken a practical way out of the problem. Effectively, it says that the rule should be abolished for all purposes in ordinary life; 125 years is long enough for anyone doing ordinary wills or trust business to be satisfied. The reason for keeping a rule at all is just as a long stop, to prevent ludicrous trusts. Even though we do not know the overall balance between the economic arguments, we know that those sorts of trusts would be harmful, and even though we do not know what the exact balance of fairness between generations should be, we know that exaggerated trusts would be unfair.
The one example that Dr. Harpum gave in evidence to the House of Lords is a good one. It is what I call the Futurama trust, in which someone leaves their estate to the first lineal descendent to reach the age of 18 after the year 3000. We can argue about whether there should be a rule overall, but such a trust would plainly be a waste of everyones time, and unfair between the generations. Therefore, a long-stop rule is perfectly acceptable and is the way out of the problem. The Law Commission has chosen that way, and the House should accept it.
There was some discussion in the Lords about retrospectivitya topic dear to all our hearts at the momentand whether one could apply the new rules to not just new trusts but existing arrangements. I suppose that there is a division of interests between transactional lawyers: those setting up new trusts and who think that one should bother only about what to do in the future, for whom the Bill is perfectly acceptable, and lawyers dealing mainly with disputeslitigationsome of whom think that there might be an opportunity here to simplify previous cases by applying the new clear rules retrospectively. The problem with that is that if someone tried to do it they would end up with all sorts of disputes about the Human Rights Act and the application of the first protocol to the European convention on human rights. It is not clear who would win that sort of dispute, only that there would be a dispute. One immediately loses the advantages that one gets from simplifying the law retrospectively, because there will be a dispute. On balance, therefore, although the issue is a bit messy, the Law Commission has got that one right as well. It means, of course, that having knowledge of the old law is still relevant, which is good for me since I am one of the few people who could be bothered with the old law.
In passing, may I ask the Minister about a point that came from the Lords, as it would be helpful to put the answer on the record? It is about the relevance of the old law under clause 7 of the Bill. Clause 7(1) talks about subsection (2) applying
if...an estate or interest would be void on the ground that it might not become vested until too remote a time.
Lady Deech in the Lords claimed that that provision would require people to understand the old law in order to apply the new law. It would not, because clause 7 is not about the old law; it is simply about clause 5. It is about the new period. It would be helpful if the Minister put that on the record in a more authoritative way than I could, so that that confusion does not continue.
Two other outstanding issues came out of the Lords debate. One is the new rule on accumulationsthe abolition of the rule against accumulations except for charities. The question is whether the new more liberal rule should apply even to existing trusts where there is a special power to create a new trust out of an existing one. There was debate about that in the Lords. As I understand it, the answer at the moment is no. However, some late evidence that came before the Lords Committee argued very strongly the other way. Lord Bach said in the Lords Committee on 30 June that
it is unfortunate that this powerful counterargument has entered the arena at a very late stage indeed.
He went on to say that perhaps we in this House could clear up the matter. It would be helpful if the Minister let the Committee know whether the Government intend to clear up that particular point in this House.
The second and slightly more fundamental point is that it became clear in evidence to the Lordsthe hon. Member for North-West Norfolk made this pointthat the rule about charities being allowed to accumulate for 21 years was not exactly enthusiastically proposed by the Law Commission. It has more to do with the views of the Charity Commission. Since the hon. Gentleman declared an interest, I should declare an interest on this point because as a fellow of a Cambridge college I am in effect a trustee of a charity. It is important that the Minister say something about the problems raised by the hon. Gentleman, in particular about how this restriction on accumulations by charities fits in with the total return method now adopted by many charities as their investment strategy. It was said in evidence to the Lords Committee that the issues are totally separate and that there will be no effect. Lord Hodgson was particularly concerned that the overall effect would be to put charities at the mercy of the Charity Commission, rather than in a position to decide their own strategies as of right.
With those minor concerns, which I hope the Minister can clear up either now or later, I am happy to join the hon. Gentleman in wishing the Bill well.

Bridget Prentice: I am grateful to the hon. Gentlemen for their support, both for the process and for the Bill itself. As the hon. Member for North-West Norfolk said, we had an interesting debate on Friday on the role of the Law Commission so it is quite prescient that we should be dealing today with something that it has produced. He also said that it was a pity that it could not be dealt with on the Floor of the House. On reflection, those colleagues who are not lawyers are probably very grateful that there has not been an opportunity for our legal colleagues to revisit their second-year law lectures and notes. Perhaps we should all be thankful for that.
The hon. Gentleman made some important and salient points. He asked whether wills made before the commencement would be subject to the old law. Yes, they would, but if the testator dies after the commencement a will made before the commencement will be subject to the old law, depending on the opt-in. It would be possible for them to be subject to the new law: it would depend on the opt-in of the testator.

Henry Bellingham: Presumably the opt-in would be in the hands of the executors rather than the testator. Is that right?

Bridget Prentice: The hon. Gentleman is absolutely right. It was my slip of the tongue. It is in the hands of the executors. It would be subject to their opt-in. He also asked who lives in being are. They are determined by the settlement deed and are also specified in section 3(5) of the 1964 Act. He raised important issues about the Charity Commission and about how easy the application to the court or the Charity Commission would be. We would not expect the application to be any more difficult than it is now. I realise that that is not perhaps the most confident endorsement of the system, but the idea is to make it as simple and straightforward as possible. I hope that it will be at least as straightforward as now, if not more so.
The hon. Gentleman asked whether the old law would be around for 100 years. We reflected on how long this would remain and whether it would be more complicated as a result, but we felt that the consequences of interfering with or affecting the terms of existing trusts outweighed any advantages of simplifying the law. That approach has been broadly supported throughout the debate on the Bill. The existing rules, therefore, will have a continuing life for some time into the future. I cannot tell the Committee exactly how long that might be, but I think that the Bill strikes the right balance and avoids any potentially adverse interference with existing arrangements.
I turn now to the points made by the hon. Member for Cambridge. I must make a note to self to order from Lovefilm the DVD of the film he mentioned, for my weekend relaxation. Perhaps I may put that off in perpetuity too. He made the important point that clause 7 relates to clause 5. He is absolutely right about that. He also raised, and gave me notice that he would do so, the issue of transitional powers. My noble Friend Lord Bach said that there are arguments both ways. Having reflected on the matter, we remain of the view that while powers of appointment can create new arrangements, those are still ultimately part of the original trust that created the power.
The Bill was therefore amended in the Lords to ensure that no existing rights or expectations would be inadvertently affected by applying it to an arrangement that was made before it came into force. On balance, we would prefer to leave things as they are, despite the interesting new issues that were raised late in the day. I hope that that covers all the questions that hon. Gentlemen have asked. If, when I read Hansard, I see that I have missed something, I will write to you, Mr. Gale, and to the Committee.

Question put and agreed to.

Resolved,
That the Committee recommends that the Perpetuities and Accumulations Bill [Lords] ought to be read a Second time.

Committee rose.